Ratings II: Zurich (Spain), HDI (Italy), National Grid, Cat Bonds of Ajax, Carillion, Newton

December 23, 2008

Standard & Poor’s Ratings Services has raised its counterparty credit and insurer financial strength ratings on non-life insurer Zurich Espana, Compania de Seguros y Reaseguros, S.A.(Zurich España) to ‘AA-‘ from ‘A+’ and assigned a stable outlook.”The upgrade reflects our revision of the company’s status to core, from strategically important, to the Zurich Financial Services group (ZFS; core operating entities rated AA-/Stable/–),” explained credit analyst Ralf Kuerzdoerfer. The change in status reflects Zurich España’s full strategic and operational integration into ZFS. D&P noted: “Local management reports directly to the CEOs responsible for the European General Insurance and Global Corporate Business units. The local operations are integrated into group wide boards responsible for areas such as investments and enterprise risk management. Zurich España shares the same brand name with the other core entities and applies the group’s global strategy and initiatives in the Spanish market.” In addition S&P pointed out that the Spanish company contributes 10 percent to ZFS’ European General Insurance unit’s gross premiums written and 13 percent to the Global Corporate Business unit. “Spain is considered one of ZFS’ target markets in Europe. Furthermore, ZFS’ management has demonstrated its strong commitment through further acquisitions in Spain in 2008, in particular, that of the insurance operations of Banco Sabadell. The stable outlook on Zurich España reflects the stable outlook on ZFS and will move in tandem with the parent in the future. Kuerzdoerfer added: “We expect Zurich España to further strengthen its integral position within ZFS and to maintain its value proposition to the group, based on its strong operating performance.”

Standard & Poor’s Ratings Services has lowered its long-term counterparty credit and insurer financial strength ratings on Italian composite insurer HDI Assicurazioni SpA (HDI/Italia or HDI/I) to ‘BBB’ from ‘A’ and removed the ratings from CreditWatch, where they had been placed on Dec. 5, 2008, with negative implications. The outlook for the ratings is now stable. Credit analyst Paola Del Curatolo explained: “The downgrade reflects our view that HDI/I’s competitive position, operating performance, and capitalization have weakened, and our review of the strategic role of HDI/I within the Talanx group.” He added that the “stable outlook on HDI/I reflects our expectation that it will remain a strategically important company within Talanx Primary Group. S&P noted that this “takes into account our expectation that HDI/I, on a stand-alone basis, will maintain its niche position within the Italian railway sector, and will be able to generate healthy technical results, although limited in absolute value, from offering credit protection in the life segment, and some related non-life business. We expect the company to maintain a combined ratio not above 102 percent. In addition, we expect operating performance to improve, following stabilization of HDI/I’s financial results. We will also closely monitor the pace of operational integration of the company into TPG and the further integration with the Italian branch office of the group’s core operating company, HDI-Gerling Industrie AG.” S&P added that the “outlook could be revised to negative if either the operating performance failed to be restored or capitalization continued to deteriorate. Negative rating actions would also depend on further reduction in strategic important status within TPG. A positive outlook is unlikely at present, given the business profile of the company.”

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit rating of “a” of National Grid Insurance Company (Isle of Man) Ltd. (NGICL), a captive of National Grid plc. The outlook on both ratings remains stable. “The ratings reflect NGICL’s strong risk-adjusted capitalization and comprehensive reinsurance program, partially offset by a volatile underwriting performance.” Best also said it “believes that NGICL’s risk-adjusted capitalization is likely to remain strong despite an 8 percent reduction of available capital in 2007-08 and further likely reduction of 7 percent in 2008-09. Owing to the substantial reduction in the quantum of a large claim relating to the 2007 UK summer floods, A.M. Best believes that NGICL is likely to release a significant proportion of its reserves for outstanding claims during 2008-09, reducing risk-adjusted capital requirements.” Best added that in its opinion, NGICL maintain a comprehensive reinsurance program, which caters to low frequency/high severity claims that the company is exposed to in its main lines of business: property damage/business interruption and third party liability. The reinsurance program consists mostly of reinsurers highly rated by A.M. Best.”

Standard & Poor’s Ratings Services has affirmed its ratings on three natural peril catastrophe bonds (cat bonds) as follows: The ratings on Ajax Re Ltd.’s class A principal-at-risk variable-rate series 1 notes and Carillon Ltd.‘s class A-1 principal-at-risk variable-rate notes are ‘CC’. The ratings on Newton Re Ltd.’s class A 2008-1 principal-at-risk variable-rate notes are ‘CCC’. S&P has also removed the ratings on Ajax Re Ltd. and Carillon Ltd. from CreditWatch with negative implications, where they had been placed on Sept. 15, 2008. The ratings on Newton Re Ltd. were removed from CreditWatch with developing implications, where they had been placed on Sept. 30, 2008 (originally on CreditWatch negative on Sept. 15). S&P explained: “The original CreditWatch placement was due to the notes’ exposure to Lehman Brothers Holdings Inc., which was the guarantor of Lehman Brothers Special Financing Inc., the total return swap (TRS) counterparty in all the transactions. Since then, we have withdrawn our ratings on Lehman Brothers Holdings and downgraded the notes on Sept. 30, 2008. All the issuers have terminated their swaps and the ratings now reflect the risk embedded within the transaction assuming that no replaced TRS are provided. Furthermore, timely scheduled interest payments were made on each of the cat bonds on Dec. 15, 2008. Accordingly, the CreditWatch placements are no longer applicable.” In addition, S&P said: “Carillon Ltd. and Ajax Re Ltd. notes remain highly vulnerable regarding future scheduled interest payments on the notes and ultimately paying the principal at maturity. The significant issues are a) the cash flow on the assets in the collateral account are not necessarily matched to those on the notes (this is part of the protection offered by a TRS counterparty), and b) a default in payment on any of these assets could result in a payment shortfall. Ultimate payment of principle now relies on the realizable value of the collateral assets at the maturity of the notes. Given the current disruption in the credit markets, asset valuations are difficult to assess. Based on the quality of the assets in the collateral trust, we expect significant impairment and therefore modest recovery. Given the significant difference between the current market value and the notional amount of the notes, we are not expecting the entire notional amount to be paid in full at maturity. Newton Re Ltd.’s class A 2008-1 notes remain vulnerable and are dependent upon favorable financial and economic conditions to make scheduled interest payments on the notes and ultimately pay the principal at maturity. However, based on the quality of the assets in the collateral trust, we believe there is a better chance of the notional amount being paid in full at maturity even though the current market value is below the notional amount of the notes.”

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